How Do I Calculate My Borrowing Capacity?
When you’re ready to buy a home, one of the first things you need to do is figure out how much you can borrow. That’s your borrowing capacity.
To calculate your borrowing capacity, martgage lenders look at your income and your debts. They use a debt-to-income ratio (DTI) to figure out how much of your income is going towards your debts.
Lenders typically like to see a DTI of 36% or less. That means that no more than 36% of your income is going towards your debts.
To calculate your DTI, you add up all of your monthly debt payments and divide it by your monthly income.
For example, let’s say you make $3,000 per month and you have the following debts:
Credit card payment: $100
Student loan payment: $200
Car loan payment: $250
Your monthly debt payments are $550. To calculate your DTI, you would divide $550 by $3,000. That gives you a DTI of 18.3%.
If your DTI is too high, you may not be able to get a loan. If it’s low, you’re in good shape.
Once you know your DTI, you can start shopping for a loan. Lenders will tell you how much they’re willing to lend you based on your DTI.
If you have a low DTI, you may be able to get a loan with a low interest rate. That’s because lenders see you as a low-risk borrower.
If you have a high DTI, you may still be able to get a loan. But, you may have to pay a higher interest rate. That’s because lenders see you as a high-risk borrower.
To get the best interest rate possible, you should try to lower your DTI. You can do that by paying off some of your debts or by increasing your income.